08 April 2005

How Long Can Housing Prices Continue Surging?

Blowing BubblesDot.Com-Style Speculation All Over Again

Mentioning the words "housing bubble" is a great way to ruin a dinner party these days. Talk radio hosts could probably rile up more listeners with that thought than any political topic in the news today.

Nothing gets people more defensive than the thought that housing prices don't always go straight up. Try telling that to people today and you'll get responses that sound a lot like dot-com share buyers in 1999.

There's something about the value of one's home that gets some people particularly emotional. Any thought that it might at some point depreciate seems impossible.

It's a herd mentality, very similar to history's occasional speculative bubbles, from tulips to shares. Young people are buying multiple properties and expecting immediate gains. There are even reports of homes being bought and sold multiple times in a single day.

After a run like this, who can blame them? The last housing market crash, in the early nineties, is a distant memory. I remember neighbors walking away from California condos because they were so far underwater, but the same well-worn units today are worth over a half-million dollars.

I'm not an economist, but certainly can wonder how long this can last in an environment of rising interest rates, a finite supply of potential buyers (most in the market must surely have bought by now) and a variety of economic uncertainties.

Lower income residents are having a harder time than ever buying homes. Notice how the most overinflated markets exist where enviro-NIMBYs have had the most luck stopping housing construction? Places like Boston, California, Seattle are still seeing runaway appreciation.

It's a great way to drive out families, young people and corporations from an area. What firm would dream of locating in Seattle, Boston or San Francisco in these conditions? As a result, the best an city can hope for, is to hang on to the jobs it now has.

Not a sound strategy for the future.

In Santa Cruz, California, the bubble is so extreme that local real estate industry leaders are openly worried about a coming crash:

The percentage of households in California able to afford a median-priced home stood at 19 percent in February, a 6 percent decrease compared with the same period a year ago, according to a report released Thursday by the California Association of Realtors in Los Angeles.

In Santa Cruz County, the percentage of households able to afford a median-price home was 12 percent in February, down from 17 percent a year earlier.

In King County, the average asking price for homes and condos last month was $385,000, a 16.8 percent increase, at $55,500, over last March. For single-family homes, the average selling price is $362,000, though the sales price for condos is more affordable, at $205,990.

"As the market is moving up, all the boats are rising with the tide," said Joe Hopkins, the Renton office broker for Keller Williams Realty. "We've been expecting interest rates to go up and things to cool off, but we're just not seeing that yet."

In Western Washington, there were 18.9 percent fewer listings, costing 12.7 percent more, last month than in March 2004. That trend, along with the continued low interest rates, translated into homes regionwide being sold in 58 days during March, 13 days quicker than last year.

"Sellers have the upper hand, at this moment in time," said Dick Beeson, a manager at Windermere Real Estate/Paragon Co. in Tacoma. "There is a wild and crazy infighting to get listings and sales, and it makes it difficult on a daily basis to negotiate between buyers and sellers."

And in Boston, the median price is down, but look at the reason given:

More entry-level buyers in the Massachusetts housing market is one reason the commonwealth's median sale price declined again last month.

The median sale price dropped to $340,000, a 1.7 percent decline from the January price of $346,000.

"It's the third consecutive month and the fifth time in the last six (months) the median price is down month-to-month," said John Dulczewski, spokesman for the Massachusetts Association of Realtors.

"More entry-level stuff has been selling in the more recent period versus what we're comparing to," Dulczewski said of recent month-to-month trends. "As (mortgage rates) came down, entry-level buyers were able to get back into the market after they were priced out last spring and summer."

The median price of a single-family house was up 11.8 percent last month compared with February 2004. "We went back from single-digit to double-digit appreciation in single families for year to year," Dulczewski said.

Ask people why they think prices will continue to soar and you're most likely to hear that burst bubble predictions have yet to come true, so obviously, the "experts" are wrong. But there were people warning of a dot-com share price collapse for several years before it actually happened.